Oral Statement by Chairman Arthur Levitt
United States Securities and Exchange Commission
Concerning H.R. 268, "The Depository Institution
Affiliation and Thrift Charter Conversion Act"
U.S. House of Representatives
Washington, D.C. -- February 13, 1997
Madam Chairwoman Roukema and Members of the Subcommittee:
I appreciate this opportunity to testify on behalf of the
Securities and Exchange Commission to discuss H.R. 268, "The
Depository Institution Affiliation and Thrift Charter Conversion
Act," introduced by Chairwoman Roukema and Congressman Vento. I
commend the Chairwoman and the Ranking Member for raising the
important issue of financial services reform so early this session.
H.R. 268 has been characterized as a "work in progress," and the
SEC is pleased to offer its perspective on the securities issues
the bill raises.
My colleagues on this panel have described how Glass-Steagall
reform could permit greater competition and efficiency in the
banking industry. As the nation's chief securities regulator, and
someone who has spent the better part of a lifetime in the
securities industry, I approach the issue with somewhat different
concerns.
Our securities markets are the envy of the world; and American
securities firms are the unquestioned leaders of those markets. In
the last year alone, our firms raised more than a trillion dollars.
This capital was raised from investors, through the entrepreneurial
and risk-taking efforts of securities firms, without the benefit of
federal deposit insurance. These markets are the engine of
American capitalism, and that engine is -- and for many years has
been -- performing at a truly extraordinary level. From my vantage
point, it's as if our engine gets 200 miles per gallon while the
rest of the world struggles to reach 50. While we should never be
complacent, and never assume we can't do better, we change the
means by which we fuel this engine at our peril.
The continuing success of our capital markets requires that we
preserve the securities industry's ability to assume risks. It
also requires that we maintain a strong system of investor
protection that establishes by word and deed that our markets are
fair and honest, and that public confidence in them is justified.
If reform is to succeed, an appropriate balance must be struck
between preserving bank safety and soundness, and serving the needs
of investors and the market as a whole. Although we agree with
some aspects of H.R. 268, it does not yet strike that balance.
Most notably, it does not set forth a workable approach to
functional regulation, and it perpetuates inconsistencies in the so-
called "two-way street." I'll describe each in turn.
Functional Regulation
As we modernize financial services, we must also modernize their
regulation. Investors should benefit if they can choose from a
wider array of products and providers -- but they should not be
expected to give up basic safeguards in the process. The SEC
continues to believe that the best way to ensure investor
protection is through a system of functional regulation, under
which all securities activities are overseen by an expert
securities regulator, and all banking activities are overseen by an
expert bank regulator.
The unprecedented number of investors in our markets today deserve
protections that apply without regard to whether they bought their
investment from a bank or a securities firm.
"Two-Way Street"
Our second concern with H.R. 268 has to do with the so-called "two-
way street." To the extent banks are allowed to own securities
firms, securities firms should be allowed to own banks.
Alternatively, if they choose, securities firms should have access
to banking functions, such as the payments system, through limited-
purpose entities that are fully subject to banking regulation, but
without also being forced to shoulder intrusive holding company
regulation. Without such competitive equality, there is a
roadblock on one side of the "two-way" street.
At the same time, the Commission believes that safety and soundness
restrictions should not be applied to an entire organization made
up of securities firms, insurance companies and other financial
service providers. Rather, these restrictions should focus solely
on the discrete banking functions within that organization.
Securities firms must be able to continue to engage in
entrepreneurial, risk-taking activities.
The Commission acknowledges the increased risks of a more
concentrated financial system but believes they can be managed
through the use of segregated entities having solid capital
requirements, strong firewalls, and a clear regulatory structure.
For this reason, the Commission supports the thrust of the risk-
assessment provisions of H.R. 268. But we believe that more could
be done to isolate bank-oriented regulation to the insured bank,
leaving affiliates to more market-style regulation.
The Commission has no objections to allowing commercial entities to
engage in the securities business. Several large U.S. securities
firms have been owned by major commercial enterprises. These
affiliations have not impaired the Commission's ability to oversee
registered broker-dealers and do not appear to have resulted in the
potential abuses that give rise to concerns about mixing banking
and commerce.
Differing Philosophies of Regulation
Finally, as deliberations on financial services modernization
advance, I urge you to be mindful of the fact that the philosophies
and cultures of the securities and banking industries, and their
respective regulators, are dramatically different. These
differences are quite intentional; the architects who constructed
them were seeking to serve distinct public policy goals.
Bank regulation is oriented around the concept of maintaining the
safety and soundness of the banking system. The theory is that by
promoting the banking system as a whole, you serve the interests of
the individuals and entities that use it and the taxpayers who
underwrite it.
Securities regulation is completely different. In part because the
securities industry does not expose taxpayers to the risk of
massive losses, and in part because we are much smaller than the
banking agencies, our regulatory program is founded on the
principle of protecting investors. The theory is that an
unwavering commitment to protecting individuals serves to enhance
the fairness and integrity of the system as a whole.
A problem at a mutual fund not too long ago illustrates the
profound importance of these differences. The case involved an
investment adviser whose employees had engaged in illegal self-
dealing that was costly to the fund. The Commission required the
adviser to compensate the fund for losses in the amount of more
than $9 million. If the adviser had been a modestly or weakly-
capitalized bank, however, would its banking regulator have ordered
this remedy? Or would it instead have concluded that the mutual
fund's shareholders were out of luck because such compensation
would weaken the bank and increase the risk to the deposit
insurance fund?
Meaningful reform must reconcile these different approaches and
reflect the dramatic changes that have taken place in the markets.
We urge the Subcommittee to work toward a regulatory framework that
fits today's marketplace without compromising our historic
commitment to protecting investors.
# # #